Monday, January 10, 2011

Mind The Gap - China wireless component demand slowed in December?

Oppenheimer's Comm. Technology team made some fairy interesting comments on RF Micro Devices (NASDAQ:RFMD) this morning. While the comments were mostly RFMD specific, I think there could be some broader read through there:

Oppenheimer notes that based on their checks, they believe RFMD could see a pause in its momentum in the December/March quarters before gaining speed again in June. Near term, the firm believes demand in China has softened somewhat while Polaris shipments remain strong. They expect these trends to reverse (China to rise and Polaris to decline) in March, but near term they see little room for upside and mix could cap margin improvements. In addition, they believe Samsung has delayed somewhat its GalaxyS2/Tab2 launch. The delay could shift some of RFMD's PowerSmart ramp into the June quarter. RFMD is managing a complicated transition (Polaris down, PowerSmart up) and they expect bumps along the road. With Opco's LT thesis unchanged, they are raising their price target on RFMD to $10 from $8.

The details:

China softness. Based on our checks we believe demand in China in December slowed somewhat and MediaTek's recent monthly results support our view. With its strong exposure to China (>10%), we believe RFMD could be negatively impacted near term although we expect a recovery in March ahead of the Chinese holidays.

- Polaris likely still strong. RFMD expects Polaris to ramp down through the March quarter. Yet, our checks suggest demand has remained above targeted levels in December. We still expect Polaris to see a material decline in 2011, but near-term results in this area could still come in higher than planned.

- PowerSmart delayed? We believe Samsung has delayed its launch of GalaxyS2/Tab2 by 3-4 weeks to refresh some of the embedded features. We believe this delay could push out some of RFMD's expected PowerSmart sales into the June quarter.

- Tweaking estimates. We're slightly tweaking down our December and March estimates to account for the near-term headwinds. We note that strong Polaris sales could also cap near-term gross margin improvement yet this should be mitigated by the June quarter (Polaris out, PowerSmart in).

- Transition = opportunity. With near-term headwinds, we believe RFMD's shares could come under pressure. Yet, our thesis is unchanged in that RFMD is ramping with multiple new customers and RF complexity is increasing. Therefore, we would encourage investors to take advantage of any weakness. Raising PT to $10.